What is IRA Bankruptcy Protection ?
IRA bankruptcy protection is a provision made by Congress that allows individual retirement account owners to protect their accounts from creditors in a bankruptcy proceeding.
Individual retirement accounts (IRA), of all kinds that are recognized by the federal tax code benefit from substantial protection from creditors during bankruptcy. President George W. Bush signed the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005 into law, which includes protection for IRAs.
Depending on the IRA type, different protections are provided by this law. IRAs, including traditional and Roth, are currently insured up to $1 million in value. No of how much money is in them, SEP IRAs, SIMPLE IRAs, and the majority of rollover IRAs are completely shielded from creditors during bankruptcy.
Certain federal regulations are applicable when it comes to IRA bankruptcy protection. Consult a lawyer if you're not sure whether your IRA funds are safeguarded in your specific situation.
Key Facts of IRA Creditor Protection
- A federal law known as IRA bankruptcy protection shields your IRAs from creditors if you file for bankruptcy.
- Federal bankruptcy protection for IRAs is provided under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.
- There is protection for both Roth and traditional IRAs up to a set monetary amount that is updated every three years. SIMPLE IRAs, SEP-IRAs and rollover IRA are not subject to the limit.
- Your IRA might not be protected in bankruptcy in some circumstances, such as divorce or paying back taxes to the IRS.
- The combined protection for traditional and Roth IRAs is presently $1,512,350, with inflation adjustments applied every three years.
- SEP and SIMPLE IRAs are completely protected in bankruptcy, much like employer-sponsored 401(k)s, profit-sharing plans, and pensions.
- Additionally, a properly executed rollover IRA from a qualified retirement plan is fully protected from creditors.
How IRA Bankruptcy Protection Works ?
Under the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), President George W. Bush signed IRA bankruptcy protection into law.
The passing of BAPCPA made it possible for IRAs, including those that were rolled over from a 401(k) plan, to finally be protected. The only qualifying retirement plans that qualified for bankruptcy protection prior to the 2005 act were 401(k) plans, pensions, and comparable employer-sponsored retirement plans. The BAPCPA's initial protection was typically only worth $1 million.
Although your IRA has a lot of bankruptcy protection, some creditors may still be able to seize part of its assets. Even after you have filed for bankruptcy, the Internal Revenue Service (IRS) and an ex-spouse may withdraw funds from your IRA.
Example of IRA Bankruptcy Protection
Suppose, you have declared bankruptcy. You have a Roth IRA with $300,000 and a 401(k) with $500,000 in it. Under the Employee Retirement Income Security Act of 1974 (ERISA), your 401(k) is unrestrictedly protected throughout bankruptcy.
IRA Assets and the IRS
Your IRA is not protected in some situations. The IRS has the authority to levy your IRA in addition to your paycheck if you owe back taxes. The IRS typically levies other assets before your IRA, but the funds in your retirement account are not exempt from the agency's reach.
IRA Assets and Divorce
If a court so orders, your ex-spouse may seize assets from your IRA. In fact, the only time an IRA account owner's death is required before their assets can be transferred directly to someone else is in the event of a divorce.
If your ex-spouse is to receive the entirety of the assets in the IRA, a court order may be necessary to shift the account's owner to them. Alternately, the order can specify that a portion of the assets in your account be moved to one designated for your ex-spouse. The transfer is tax-free in both scenarios provided that the court order's requirements are followed.
IRA Bankruptcy Exemption
The aggregate bankruptcy exemption limit for IRAs is $1,512,350 as of April 1, 2022. On April 1, 2025, the next increase will go effective.
This exemption amount has increased from the initial $1,000,000 exemption limit set down in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Public Law 109-8, and is subject to cost-of-living adjustments (COLAs).
The limitation is reviewed every 3 years and increased, if cost-of-living adjustments measures warrant. The amount of assets accumulated in employer-sponsored retirement plans is not subject to a maximum exemption.
Types of IRA Bankruptcy Protection
IRA bankruptcy protection covers all types of individual retirement account (IRA). They are as follows:
1) Traditional IRAs and Roth IRAs :
Traditional and Roth IRA bankruptcy protection thresholds were raised every three years. The limit was increased in 2022 from $1,362,800 to $1,512,350. Traditional and Roth IRA protection limits apply to the total amount of these accounts, not to each individual account.
2) SEP-IRAs and SIMPLE IRAs :
The Saving Incentive Match Plan for Employees of Small Employers (SIMPLE) IRA and the Simplified Employee Plan (SEP) IRA are fully protected in case of bankruptcy. There is no limit on the amount that is protected, they are equally protected to traditional and Roth IRAs. These safeguards are comparable to those that have long been provided to other employer-sponsored IRAs, such as 401(k) and profit-sharing plans.
3) Rollover IRAs :
A rollover IRA is a regular or Roth IRA account that was initially established through a transfer from a qualified retirement plan for the purposes of the BAPCPA. Standard 401(k) plans, conventional pension plans, and some profit-sharing plans are examples of qualified retirement plans.
A properly conducted rollover IRA from a qualified retirement plan is completely protected from creditors in a bankruptcy under the BAPCPA. These accounts' protection does not have a cap, just like SEP and SIMPLE IRAs.
Because the maximum account balance is greater than most IRA investors are likely to achieve through a combination of their contributions and the gains made on them during their working years, the bankruptcy protection limit imposed on traditional and Roth IRAs covers the vast majority of account holders. Furthermore, if "the interests of justice so require", the BAPCPA authorizes the protected amount to exceed the limit.
Remember that, except from the source of the assets, a rollover IRA is substantially identical to any other traditional or Roth IRA after the rollover of assets is finished. It is a good idea to establish a separate IRA account for the rollover assets separate from any other existing traditional or Roth IRA in order to assure full protection for a rollover IRA coming from a qualified retirement plan.
Filing for Bankruptcy After Retirement
Bankruptcy will have a different impact on you if you are currently using your retirement assets and getting retirement income. You should take into account your whole income from both your retirement income and funds depending on whatever Chapter you submit when it comes to :
- The Chapter 7 Means Test
- The monthly payments for a Chapter 13 repayment plan
Even if you are retired, you may still be eligible for one of these bankruptcies. Remember that neither your Social Security benefits nor any other form of income are considered in any sort of bankruptcy.
The Bankruptcy Code contains complicated federal laws, and state-by-state variations are also permitted. Before declaring bankruptcy, you can talk about your bank accounts, retirement plans, federal bankruptcy exemptions, and more.
IRA Bankruptcy Protection by State
Each state is different with regard to extent by which individual retirement accounts are protected. So, check the list below to see if your state offers the exemption for the Roth or traditional IRA.
|
State |
State Statute |
Traditional IRA |
Roth IRA Creditor
Protection? |
|
Alabama |
Ala.
Code §19-3B-508 |
Yes |
Yes |
|
Alaska |
Alaska
Stat. §09.38.017 |
Yes |
Yes |
|
Arizona |
Ariz.
Rev. Stat. §33-1126(B) |
Yes |
Yes |
|
Arkansas |
Ark.
Code §16-66-220 |
Yes |
Yes |
|
California |
Cal.
Code of Civ. Proc. §704.115 |
Partly |
No |
|
Colorado |
Colo.
Rev. Stat. §13-54-102 |
Yes |
Yes |
|
Connecticut |
Conn.
Gen. Stat. §52-321 a |
Yes |
Yes |
|
Delaware |
Del.
Code Ann. tit. 10, §4915 |
Yes |
Yes |
|
Florida |
Fla.
Stat. §222.21 |
Yes |
Yes |
|
Georgia |
Ga.
Code §44-13-100 |
Yes |
No |
|
Hawaii |
Haw.
Rev. Stat. §651-124 |
Yes |
Yes |
|
Idaho |
Idaho
Code §55-1011 |
Yes |
Yes |
|
Illinois |
735
III. Comp. Stat. 5/12-1006 |
Yes |
Yes |
|
Indiana |
Ind.
Code §34-55-10-2(6) |
Yes |
Yes |
|
Iowa |
Iowa
Code §627.6(8) |
Yes |
Yes |
|
Kansas |
Kan.
Stat. §60-2308 |
Yes |
Yes |
|
Kentucky* |
Ky.
Rev. Stat. §427.150(2)(f) |
Yes |
Yes |
|
Louisiana |
La.
Rev. Stat. §§20-33(1) and 13-388KD) |
Yes |
Yes |
|
Maine |
Me.
Rev. Stat. tit. 14, §4422(13)(F) |
Partly |
No |
|
Maryland |
Md.
Code Cts. & Jud. Proc. §11-504(h) |
Yes |
Yes |
|
Massachusetts |
Mass.
Gen. Laws ch. 235, §34A |
Yes |
Yes |
|
Michigan* |
Mich.
Comp. Laws §600.6023(j) |
Yes |
Yes |
|
Minnesota |
Minn.
Stat. §550.37(24) |
Yes |
Yes |
|
Mississippi |
Miss.
Code §85-3-1 |
Yes |
No |
|
Missouri |
Mo.
Rev. Stat. §513.430.1 |
Yes |
Yes |
|
Montana |
Mont.
Code §31-2-106(3) |
Yes |
No |
|
Nebraska |
Neb.
Rev. Stat. §25-1563.01 |
Partly |
No |
|
Nevada |
Nev.
Rev. Stat. §21.090(1 )(r) |
Yes |
Yes |
|
New
Hampshire |
N.H.
Rev. Stat. 52 §511:2 |
Yes |
Yes |
|
New
Mexico |
N.M.
Stat. §§42-10-1,-2 |
Yes |
Yes |
|
New
Jersey |
N.J.
Stat. 25:2-1 (b) |
Yes |
Yes |
|
New
York |
N.Y.C.P.L.R.
5205(c) |
Yes |
Yes |
|
North
Carolina |
N.C.
Gen. Stat. § 1C-1601 (a)(9) |
Yes |
Yes |
|
North
Dakota |
N.D. Cent. Code
§28-22-03.1(7) |
Yes |
Yes |
|
Ohio* |
Ohio
Rev. Code §2329.66(A)(10) |
Yes |
Yes |
|
Oklahoma |
Okla.
Stat. tit. 31, §1(A)(20) |
Yes |
Yes |
|
Oregon |
Or.
Rev. Stat. §18.358 |
Yes |
Yes |
|
Pennsylvania |
42 Pa.
Cons. Stat. §8124(b)(1 )(ix) |
Yes |
Yes |
|
Rhode
Island |
R.l.
Gen. Laws §9-26-4(11) |
Yes |
Yes |
|
South
Carolina |
S.C.
Code §15-41-30 |
Yes |
Yes |
|
South
Dakota |
S.D.
Codified Laws 43-45-16;43-45-17 |
Yes |
Yes |
|
Tennessee* |
Tenn.
Code §26-2-105 |
Yes |
Yes |
|
Texas |
Tex.
Prop. Code §42.0021 |
Yes |
Yes |
|
Utah |
Utah
Code §78-23-5(1 )(a)(xiv) |
Yes |
Yes |
|
Vermont |
Vt.
Stat. tit. 12, §2740(16) |
Yes |
Yes |
|
Virginia |
Va.
Code §34-34 |
Yes |
Yes |
|
Washington |
Wash.
Rev. Code §6.15.020 |
Yes |
Yes |
|
West
Virginia |
W.Va.
Code §38-10-4 |
Yes |
No |
|
Wisconsin |
Wis.
Stat. §815.18(3)(j) |
Yes |
Yes |
|
Wyoming |
Wyo.
Stat. §1-20-110 |
Partly |
Partly |
Frequently Asked Questions
How can I protect my IRA from creditors?
If you have declared bankruptcy, you can be qualified for federal IRA bankruptcy protection up to the dollar amount. Depending on the state you live in, you can potentially be qualified for state IRA protection outside of bankruptcy. Be aware that state regulations concerning IRA contributions made within a specific time window may exist.
When does bankruptcy protection for an IRA withdrawal lose?
Withdrawing money throughout your bankruptcy process can make things more difficult. If you're getting retirement IRA payouts but have outstanding federal debt, the government may be able to seize those funds. Make sure the action has been permitted by the court before withdrawing funds from your IRA while you are filing for bankruptcy. Speak with your attorney first.
How much protection are provided by traditional and Roth IRAs?
For assets held in a traditional IRA or a Roth IRA worth up to $1 million, BAPCPA changed federal bankruptcy law to offer protection. Both traditional and Roth IRAs are protected during the current three-year term, which started on April 1, 2022, up to a total dollar amount of $1,512,350 per person. This limited protection covers the aggregate of all traditional and Roth IRA accounts held by a specific person, not just one particular IRA account.
While the BAPCPA does not provide any protection for regular or Roth IRA money in excess of $1,512,350, the statute does allow bankruptcy courts to provide further protection if the judge determines that it is in the best interests of justice.
Is 401(k) or IRA Protected in Bankruptcy?
Yes, you are protected from bankruptcy if you have a 401(k) or an IRA. Your retirement accounts are not a part of your "bankruptcy estate" unless there are exceptional or extraordinary conditions. You won't be required or expected to use retirement assets to pay off debt.
Are inherited individual retirement accounts (IRA) protected from creditors?
No, IRA that you inherit are not protected. According to federal bankruptcy laws, they may be seized. An IRA that you inherit could be taken by general creditors.